Emerging markets debt produced strong total returns in the second quarter. An increase in commodity prices, accommodative central bank actions, signs of economic stability, and promising political developments improved investor sentiment. Very low yields in developed markets encouraged investor demand for higher-yielding assets, benefiting emerging markets bonds. Investor inflows to dollar-denominated emerging markets debt picked up, balancing increased new supply. In April, Argentina sold $16.5 billion of new sovereign bonds in the largest-ever issue of emerging markets debt. The country had not issued bonds in almost 15 years and had spent much of that time battling holdout creditors following its default on over $80 billion in debt in 2001.

The Emerging Markets Bond Fund returned 6.44% in the quarter compared with 5.40% for the J.P. Morgan Emerging Markets Bond Index Global and 4.68% for the Lipper Emerging Market Hard Currency Debt Funds Average. For the 12 months ended June 30, 2016, the fund returned 10.85% versus 10.32% for the J.P. Morgan Emerging Markets Bond Index Global and 4.98% for the Lipper Emerging Market Hard Currency Debt Funds Average. The fund's average annual total returns were 10.85%, 5.00%, and 7.09% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2016. The fund's expense ratio was 0.93% as of its fiscal year ended December 31, 2015.

For up-to-date standardized total returns, including the most recent month-end performance, please click on the Performance tab, above.

Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results.
Share price, principal value, and return will vary and you may have a gain or loss when you sell your shares.

The Emerging Markets Bond Fund charges a 2%
redemption fee on shares held 90 days or less.
The performance information shown does not reflect the deduction of the redemption fee;
if it did, the performance would be lower.

We favor bonds issued by countries with strong recovery or reform themes that position them well for healthy long-term growth. For example, Brazil remained the fund's largest overweight relative to the benchmark. We added to our Brazil exposure throughout the quarter as the process of impeaching President Dilma Rousseff progressed and acting President Michel Temer's government introduced legislation to improve the country's fiscal position. On the other hand, the portfolio was underweight debt from countries that are more exposed to the risk of faltering European growth and those that offer limited relative value. China was still the portfolio's largest underweight because most of the country's bonds that are available to outside investors are quasi-sovereign issuers that trade at elevated valuations.

The long-term fundamental drivers of emerging markets, including stronger balance sheets and faster growth than developed countries, remain intact. However, there are significant risks, such as the potential for an abrupt economic slowdown in China. We anticipate that the Chinese government will be able to successfully redirect its economy toward a more sustainable, consumption-led model, but we are mindful that its efforts could fall short. Also, although the volatility triggered by the UK's Brexit vote seems to have convinced the Federal Reserve to delay further interest rate hikes, a faster-than-expected Fed tightening could hurt sentiment toward emerging markets debt.

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